Recession Is Coming. This Is How Hard It Will Be.
To say that the Federal Reserve made a mistake would be an understatement. I probably couldn’t do any better, but that doesn’t mean they didn’t make a mistake. I explained in my last video that the government caused our current inflation by injecting money into the economy through stimulus spending and low-interest rates. Their mistake was letting low-interest rates run for too long. And now a recession is imminent. In this episode, we’re going to talk about how long a recession will last and how bad it will be. My name is Kris and this is the think report.
In the last episode, I explained that the government caused inflation through stimulus spending and low-interest rates. In this episode, I’ll explain how we are heading to a recession.
Are we heading into a recession?
The are several reports from some pretty large investment banks that are warning against a recession in Q1 of 2023. The October 12th report from RBC explains that “...the pressure is still building. While the Bank of Canada is expected to lift the overnight rate to 4%, the U.S. Federal Reserve will likely hike to between 4.5% and 4.75% by early 2023. These factors will hasten the arrival of a recession, which we now expect to start in the first quarter of 2023”
The world bank states that “Several historical indicators of global recessions are already flashing warnings. The global economy is now in its steepest slowdown following a post-recession recovery since 1970”
Recessions happen every two years. We had one in e2008, in 2001, and in the early 90s. So to say that a recession is coming in 2023 is totally reasonable.
The US economy tends to be a little more resilient than other countries, including Canada, but nonetheless, it’s becoming more clear that a recession is imminent in early 2023.
Allow me to illustrate. If you graph GDP against the market value of the US economy (for this situation we’ll just use the S&P 500 as a proxy), you can see there’s a divergence between output (GDP) and valuation (S&P 500). These two graphs should most together. When they don’t, that’s called divergence, and can indicate a change in direction. In this case, downwards.
How bad will it be?
We can try to make a guess about how bad the recession will be by looking at historic data. If we take a look at the S&P 500 again as a proxy for US economic market cap, the 2001 recession hit its low point in January 2003 at $860. Looking back, the last time the S&P 500 was valued at around the same price was in April 1997, that’s almost 6 years.
We can do the same thing with the 2008 housing crisis which hit its low point in January 2009 at about $800. Looking back again, the last time the S&P 500 was valued at around the same price was actually before the 2001 crisis, but for simplicity, we’ll just say that it was January 2003, which is 6 years.
So if we take 6 years as the period of growth that our two most recent recessions wiped out, and we know that we will hit a recession in Q1 2023, we can look back another 6 years to the value of the S&P 500 in January 2017, which is $2330.
That means that from its high point in January 2021, the S&P 500 (which is our proxy for the economy) will fall from a price $4670 to $2330. That effectively wipes out 50% of the value in the US economy. The current value of the S&P is $3670, which means we currently aren’t halfway to the bottom yet.
Think about that.